Deductibility of interest

Hi folks

Can someone please further explain the meaning of point 2?

My understanding is that the 45 day rule applies to the FC when the dividend is > $5k how then does this get to $16666?

Also has anybody done a study on how long on avg does the drop in the ex div price last. Obviously there are all sorts of external factors but none the less there must be a time frame beyond which the market will start looking towards the next dividend.

Cheers

 

Franking credit limit $5,000 (not dividend limit)

Company tax rate 30%

FF dividend limit = $5,000 / 30% = $16,667 Gross

Or $11,667 cash amount fully franked.

I have not studied any source data. However, various investment houses publish strategies to trade over the 45 day period to make modest gains.

Here is a link, with no particular recommendation:

Dividend Yield. Build the best dividend yield with Macquarie Prime

Personally, I don't look at such short term activity based on expected price movements. It takes a bit of work to research a potential investment on my part.

Cheers,

Rob

 

From You and Your Shares (NAT2632-6.2007)
Holding Period Rule
The holding period rule requires you to hold shares ‘at risk’ for at least 45 days (90 days for preference shares) to be eligible for the franking tax offset. however, this rule does not apply if your total franking credit entitlement is below $5,000, which is roughly equivalent to receiving a fully franked dividend of $11,666 (based on the current tax rate of 30% for companies).
All this means is that you must own shares for at least 45 days, or 90 days for preference shares (not counting the day of acquisition or disposal), before being entitled to any franking tax offset.
Days on which you have 30% or less of the ordinary financial risks of loss and opportunities for gain from owning the shares cannot be counted in determining whether you hold the shares for the required period.
The financial risk of owning shares may be reduced through arrangements such as hedges, options and futures.


Sorry! My typo. $11,667, not $16,667.
$11,667 x 0.3 / 0.7 = $5000.

But think about this... my wife and I are joint owners of our share portfolio, so we can hold a substantial portfolio before we have to worry about the holding rule...
As I recall the ASX200 is about 80% franked and yield is 3.9%, so we can hold about $750k of shares ($375k each) which pay $29k dividends ($14k each) which give $10k in FCs ($5k each).

And this is just to satisfy the 45 day rule! I plan to hold them for 45 years!

Once again, sorry about the error.
- Rod

 

I guess with the absence of IPO's these days and takeover activity being quiet, then short term players might want this sort of activity.

Also, the more that play it then the more efficient the market becomes.

This means I justify being a 'laggard' not participating, by arguing that everyone is doing it and killing the margins.

Cheers,

Rob